We have revised our 2025 outlook for US interest rates and the USD, recalibrating their declines after Trump’s victory in the US Presidential Elections. We now anticipate the Fed Funds Rate reaching a floor of 3.50% in 2Q25, up from our prior forecast of 3.00% in 3Q25. Consequently, we project the DXY to remain near the lower boundary of its two-year range of 99-107 by mid-2025 rather than entering a lower 95-100 range as previously forecasted.
We recall that the DXY rose following Trump’s 2016 victory, only to reverse into a decline in 2017. Trump’s inauguration as the 47th President of the United States is scheduled for January 20, 2025, bringing with it questions about whether his ambitious campaign promises can transition from rhetoric into reality.
Until gaining more clarity on the incoming administration’s actual policies, the Fed is committed to a more neutral stance laid out in September. Fed reckoned monetary policy was still restrictive even with today’s tax cuts. Having cooled from its overheated state two years ago, the labour market is in balance and does not need further cooling to achieve the 2% inflation target. This Wednesday’s US CPI data should affirm expectations for a rate cut in December, with headline and core inflation likely to remain unchanged at 0.2% MoM and 0.3%, respectively.
Trump’s approach to the USD has been inconsistent and reactive rather than part of a coherent long-term strategy. For example, his threat of 100% tariffs on nations reducing USD reliance could inadvertently accelerate de-dollarisation. His potential push for increased Fed influence also risks diminishing the USD’s appeal as a stable reserve currency. As will his ambitious fiscal policies (e.g., extending the 2017 tax cuts) by putting the national debt on an unsustainable trajectory through 2035, as signalled by recent bond yield rises. While Trump champions reshoring to bring manufacturing jobs back to the US, his criticisms of the weak JPY and CNY reflect concerns over trade imbalances and the competitiveness of US exports.
Trump’s proposal to impose blanket tariffs of up to 20% on all imports from all countries encounters legal, political, and economic challenges. US trade law limits the president’s ability to impose tariffs unilaterally without an investigation by the Department of Commerce or the Trade Representative Office. Blanket tariffs lacking justification on national security or trade violation grounds could violate WTO rules and invite retaliation. Indiscriminate tariffs could also face backlash from US companies and labour groups by raising import costs for companies and triggering price increases for consumers. Overall, the broader implication for the USD depends on whether Trump’s promises can translate into concrete actions, but his strategy appears double-edged for now.
Quote of the Day
“Leaders are more powerful role models when they learn than when they teach.”
Rosabeth Moss Kanter
November 11 in history
At the 11th hour on the 11th day of the 11th month of 1918, the Great War ended.
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